Low demand, high Brent, regulations threaten US refineries

18 January 2012 22:51[Source: ICIS news]

HOUSTON (ICIS)--More US refineries will likely shut down because of falling US fuel demand, higher prices for Brent versus other grades of crude and increasingly stringent and costly environmental regulations, an analyst said on Wednesday.

“Demand in emerging markets has overtaken demand in the US [for fuel],” said PFGBest analyst Phil Flynn. “Demand for production is really not making financial sense right now.”

US consumption of finished gasoline slipped to 8.179m bbl/day for the first week of January, which was the lowest consumption rate since February 2003, according to the US Energy Information Administration. Consumption measured 8.106m bbl/day the week of 7 February 2003.

Already, US-based Hess and Petroleos de Venezuela plan to permanently close their joint venture St Croix refinery in the US Virgin Island in February. The refinery mainly serves the US east coast.

Sunoco’s 178,000 bbl/day Marcus Hook refinery and ConocoPhillips’ 185,000 bbl/day Trainer refinery, both in Pennsylvania, already have shut down until a buyer is found. Sunoco’s 335,000 bbl/day Philadelphia refinery in Pennsylvania will shut down if no buyer is found by the summer.

“So right now we’re seeing [refineries] shut down one right after another,” said Flynn.

American Petroleum Institute (API) Chief Economist John Felmy said the refining industry has been under great strain the past year. Felmy said there is a fear of additional refineries shutting down for those tied to Brent crude supplies.

Brent crude is at a premium of about $10/bbl to West Texas Intermediate (WTI), down from a premium of $28/bbl at the end of summer. The increased cost of Brent for refiners decreases profits from the yields of gasoline and distillates.

“Refiners are like bakers. You don’t control the supply or prices of what you input, like grain, and you don’t control the prices of what you sell,” Felmy said.

The shut down of the St Croix refinery serves as a reminder that the refining business is not lucrative for some companies, and capacity may continue to drop as US demand drops and capacity is added in other countries, said analyst Patrick DeHaan for GasBuddy.com.

Sunoco, which primarily operates on the east coast, reported a loss of $17m (€13m) for its refining sector during the third quarter of 2011.

At the same time, refiners have to contend profit-draining regulations.

Refiners are among the most heavily regulated industry in the US, and the environmental rules to reduce emissions are extensive, said Bob Greco, API group director of upstream industry operations. In addition, US refineries must compete globally with less regulated refinery operations.

Flynn said the expense of complying with new clean air regulations and the loss in profits because of low demand has led to the recent shutdowns.

“Some of the clean air regulations put on these refineries are going to have to change, or what’s going to have to change is that product demand is going to have to come back, and I don’t see either one of those happening,” Flynn said.